Wednesday, February 04, 2009

Why Growth is the Best Response to a Downturn

Newsweek rounds up some very smart CEO's, who realize that the best time to build market share and invest in R&D is during a downturn. Playing defensively will set you behind in the long run, but may be the only way out if your finances are askew in the near term.

There is a general rule in business life: market share is won or lost during transitions. These periods can be times of technological or economic change, or when buying habits or other norms shift suddenly with a new generation. For example, the movement to digital from film cameras abruptly moved market share to Sony from Kodak. When Americans switched to fuel-efficient cars from SUVs, Toyota won customers from Detroit.

We should expect to see similar changes in market share as companies respond differently to the financial crisis. The analyst community will be lauding major cutbacks in spending and head counts, and moderating production capacity to align with demand makes sense. But companies that cut back on research and new product development do so at their peril. In the high-tech marketplace, for instance, companies that cut deep into R&D will probably fall behind competitors who continue to invest. In autos, aerospace, consumer electronics and many other industries, the same imperative holds true: you cannot save your way out of a recession, you can only invest your way out.

-Craig Barrett, Recently retired chief executive officer of Intel

Corporate leaders somehow need to judge how long the global slowdown will last. If the slump turns out to be severe but only short-term, companies that reduce inventory and cut back staff too aggressively will suddenly have to restock and rehire just as aggressively. But for most CEOs, especially those running public companies that risk falling stock prices, it seems easier to cut and take the risk. The equity markets are likely to remain unforgiving of companies that are too optimistic and don't cut costs.